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Oct 13 2011

Top 10 Flaws in Government’s “Clean Energy Future”

Yesterday the Australian House of Representatives passed the Clean Energy Future legislation, but it doesn’t feel like much of a victory.

A carbon price is a first step in Australia’s necessary transition away from its current fossil fuel economy toward the renewable energy one of the future. The Clean Energy Future includes significant improvements on the 2009 version – the creation of the independent Clean Energy Finance Corporation (CEFC) and Australian Renewable Energy Agency (ARENA) should provide some certainty for the renewable energy industry; and the built-in cycle of independent reviews provides opportunities to improve the policy later on. However, the legislation still has many fundamental flaws which we should not be reluctant to point out.

#1 Gas Is Not Clean Energy

The policy risks driving investment in gas-fired electricity generation. As a fossil fuel, gas is part of the problem, not the solution. The only realistic solution is to phase out fossil fuels. A two-staged transition, from coal to gas to renewables, would waste precious time.

For businesses, gas investments carry the risk of eventually being shut down to mitigate climate change. For humanity, the far worse risk is that we build a fleet of polluting gas power plants and run them for their full lifetime of up to 60 years. It is questionable whether gas is even a low-carbon fuel; when “fugitive emissions” (methane leaks) are taken into account, gas may be comparable to coal on a 100-year timescale, and far worse on a 20-year timescale.

#2 Free Permits for Polluters Guaranteed

Australia’s onshore emissions are ~1.5% of global emissions, but our fossil fuel exports account for ~3% of global emissions, and they are planned to double in the next decade. Australia’s carbon price will not cover the emissions from actually burning those exported fossil fuels, only emissions released to the atmosphere before they leave Australia’s ports. Yet the Government sees fit to compensate exporting industries for the majority of their covered emissions.

There may be a case for compensating industries for lost competitiveness in the absence of a global agreement, though this is very dubious: the Grattan Institute says a carbon price will be dwarfed by other factors. Labor’s free permits go beyond any justification. The Government has justified increasingly extravagant compensation as a “global recession buffer”, despite the recession itself having passed. The $23 price is diluted to $1.27 for the highest-polluting export industries. The steel industry is actually overcompensated and will improve its profits. And the compensation reduction rate is so minuscule (1.3% per year) it allows the total number of free permits to rise over time.

These ridiculous levels of free permits are locked in: changes with a negative effect on businesses cannot be made until mid-2017. Furthermore, there is a three-year notice period, meaning it won’t be possible to implement the recommendations of the 2014-15 Productivity Commission review until July 2018. Government should have the power to respond promptly when circumstances change. Any errors that are identified should be corrected immediately, with the funding redirected to ARENA/CEFC.

#3 Hiding Emissions Overseas

Australia will be linked to international carbon markets from 2015 (albeit with a 50% limit on international permits). This allegedly allows Australia’s domestic emissions to exceed our emissions cap while having no effect on net emissions to the atmosphere; but it is highly dubious whether it will achieve the same emissions outcome in reality as on paper.. The credibility issues with carbon offsets are well-known. There will be restrictions but it is difficult to tell how they will work in practice.

Australia’s 2050 emissions target is an 80% cut, compared to an 80% rise under business-as-usual. Therefore if the market takes full advantage of the 50% upper limit, there’ll be virtually no change in Australia’s domestic emissions by 2050. Offsetting emissions overseas is not a serious way to tackle Australia’s contribution to climate change; we can and should cut our own emissions.

(CORRECTION 13 October 2012: The 50% limit is effectively no limit at all, as explained here.)

#4 Renewable Energy Support is Weak

ARENA and CEFC are an integral part of the MPCCC agreement, yet the relevant bills weren’t passed with the rest yesterday. The Government mustn’t back away from its renewable energy policies.

Of the announced $10 billion for CEFC over five years, only $0.9 billion materializes in the forward estimates. It is not at all obvious how, in the remaining three years, the Government is suddenly going to find an average of $3 billion per year for the body. It would make more sense for CEFC to receive $2 billion per year from the beginning. Also, it should be renamed the Renewable Energy Finance Corporation and all of its funding directed to renewables; no fossil fuel or fossil-renewable hybrids. This is not “picking winners”, as there are many available renewable options.

#5 Independent Reviews Should Be Sooner

The many independent reviews are one of the best elements of the Clean Energy Future, providing regular opportunities to correct errors of judgment. However, the first reviews should occur earlier to get it right as early as possible. Given the Climate Commission has identified the 2010s as the “Critical Decade”, it is unwise to waste too many years trialing the carbon price.

#6 Too Low A Price

The $23 per tonne starting price is far too low to make renewable energy economically attractive. It should rise faster than a few percent per year, and there should be no price ceiling. Businesses must have certainty of a high carbon price in the future.

#7 Fossil Fuel Subsidies

A carbon price should make polluters pay, but existing policies will be working against it. Currently Australia spends $11.1 billion per year on perverse fossil fuel subsidies, including fuel tax rebates, non-indexing of fuel excise, aviation concessions, and depreciation concessions for fossil fuel assets. Although the Clean Energy Future introduces fuel tax credit reductions and equivalent carbon prices on some fuels, these measures only amount to $3.3 billion over the fixed price period.

The carbon price will raise $24.5 billion of permit revenue over the fixed price period, with $11.2 billion returned to fossil fuel industries as compensation. Carbon price compensation is also a fossil fuel subsidy. Altogether, the combined value of industry compensation and existing fossil fuel subsidies over the three years will be $41.2 billion, $16.7 billion greater than the revenue raised by the carbon price. (And this is a conservative estimate, since it doesn’t include the free permits for coal-fired electricity generators.)

Australia spends far more on fossil fuels than renewables, contradicting the Government’s stated vision of a clean energy future. The existing subsidies should be cut entirely and transferred to ARENA/CEFC.

#8 Cash for Coal

The Clean Energy Investment Plans to be made by coal-fired electricity generators should not include any investments in new fossil fuel generation capacity. Generators planning to invest in fossil fuels should not receive free permits. Coal power plants paid to close should be replaced with solar power plants, and the payments should be small.

#9 No Ban on New Coal Power

The Government claims the carbon price will rule out new coal-fired power plants. Instead of merely assuming so, the legislation should explicitly ban them.

#10 Hiding Emissions in the Land?

After 2015, companies can buy unlimited Australian carbon credits. These should be limited like international offsets, because not all tonnes of CO2 are equal.

The atmosphere and land vegetation naturally exchange carbon on human timescales. There is an important distinction between moving carbon between these, and digging up fossil carbon that has been buried for millions of years. The fossil carbon will stay aboveground for millennia, but the land is a climate feedback so cannot store carbon permanently. Even if forest cover was returned to preindustrial levels, the carbon cycle would still be overwhelmed by fossil fuel emissions. It is fossil carbon we urgently need to stop emitting.

The Next Step

The Clean Energy Future could waste several years of the Critical Decade. It locks in polluter compensation, defers renewable energy funding, encourages gas investment, and even allows Australia’s emissions to rise. In my more optimistic moments, I think it has the dubious distinction of not being worse than nothing. In my more pessimistic moments, I have doubts about the effectiveness of any emissions trading scheme (but that’s a topic for another post).

It is disheartening that a policy so riddled with flaws is seemingly all that is politically achievable today, and the serious policy issues are obscured by the political shouting match in the media. Where can the climate movement go from here?

I suggest we replace our current message of “Say Yes” to a carbon price with a pro-renewable, anti-gas-fired energy message. You only need to read the newspapers to know most political insiders – journalists, politicians, think tanks, businesses, and economists – believe gas is the future and renewable energy is at best a small part of the solution. Myths like “Renewable energy can’t provide baseload power” are widely accepted as fact. In reality, we need to replace fossil fuel energy ASAP; gas is part of the problem and renewable energy is the central solution. (UPDATE: I have revised and clarified my thoughts on this point here.)

The specific policies we might advocate could be the subject of a whole separate post, but they include a national feed-in tariff for large-scale renewable energy, a ban on new coal-fired and gas-fired power plants, and phasing out Australia’s fossil fuel exports. If these things seem politically unrealistic today, then we need to make them politically realistic.

The above is an edited version of a submission I made to the Joint Select Committee on Australia’s Clean Energy Future Legislation.

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